The True Cost of Term Insurance
Why "cheap" coverage is costing Americans millions.
TL;DR
Crazy hypothesis:
Is term insurance to blame for the fact that every generation seems to essentially start from zero, financially?
In this article, I break down the real financial math behind term insurance versus whole life insurance, revealing how a seemingly 'cheap' $1,100 annual term premium can actually cost a family over $43 million across three generations. I'll show you why comparing these two types of insurance requires understanding net compound costs, not just premium prices.
If you've been taught to buy term and invest the difference, I think you'll be surprised by what I'm about to show you. We're going to dig into some numbers and look at the true cost of term insurance – and I mean the real costs, not just the monthly premium you see advertised.
Watch my podcast episode on this topic →
Life Insurance as an Asset Class
Let's start by talking about asset classes. You've got stocks, bonds, treasuries, real estate, cryptocurrency, your business – these are all different asset classes. Life insurance, specifically whole life insurance, is just another asset class.
Whole life insurance is considered a cash equivalent.
There are a lot of strong opinions out there about whole life insurance versus term, but if you really boil it down, whole life insurance is just another asset class that may or may not have its place in your financial life, just like any of those other asset classes.
Here's something interesting I see all the time: People are very adamant about paying a lower price for their life insurance. They talk about buying cheap term insurance to cover the life insurance side of it. Yet, if you ask those same people whether they'd rather pay a lower amount for where they live by renting or a higher amount by making a mortgage payment and buying a house, most would say they'd rather pay the higher amount to buy the house.
The reason is pretty simple – they know they're buying an asset. Every time they make a mortgage payment, it builds equity in their house, in the asset.
Renting vs. Buying Life Insurance
What's crazy is this conversation is actually pretty much the same conversation when it comes to buying term insurance versus buying whole life insurance.
When you buy term insurance, it's kind of like renting an apartment. Every time you make your rent payment, you pay it every month, and then when you move out of the apartment, you don't get any of the rent money back. It's the same thing with term insurance. You make your term premium payments, and when the term is over, the policy is done and you don't get any of that money back.
Whole life, on the other hand, is much more like buying a house. Every time you make a mortgage payment, you build equity in the house. With whole life insurance, every time you make a premium payment, you build equity in the policy. The asset in this case is the guaranteed future cash flow coming from the death benefit. The equity is the cash surrender value — the net present value of the future death benefit.
When you look at it like this, a lot of the objections that people have towards whole life stop making as much sense.
Term Insurance is Probably a Liability
Something that I don’t think is super-well-known is the fact that only like 1% of term insurance death benefits actually pay out. With term insurance, you have life insurance protection during a time when it’s statistically highly unlikely you’ll die. Then at the end of the term, you no longer have life insurance protection during a time when it’s guaranteed you will die.
It's a little bit backwards in terms of having only term insurance to protect your life. That's why the premium price is so much lower – because the insurance company understands this and that's how they're able to price it that way. The risk to them is much, much lower during the age when you qualify for term insurance.
You Can't Use Grade School Math for Financial Decisions
Knowing this, we can't just compare the premium price at face value. We can't use grade school math and just add up the premiums and compare these two life insurance products because it really just doesn't tell us the full story. Whole life insurance is an asset. Term insurance is most likely a liability.
When we compare these two things, we actually have to use financial math. And when we use financial math, we have to include the variable of time. We must also account for the cost of money.
Let me show you what I mean with real numbers. Let's look at a 30-year, $1,000,000 level term insurance policy. We can't just add up the premiums over 30 years and come to the cost.
Remember, as Nelson Nash explained: “You finance everything you buy. You either pay interest to someone else when you borrow, or you give up interest you could have earned when you pay.”
So we actually have to assign a cost of money to these out-of-pocket premiums. Let's say the cost of money is 4%. So we're giving up 4% every year on top of the premiums that we're paying over 30 years. That's actually the correct way to calculate the cost, not the price of the term insurance.
In this example, the price is $1,100 a year. That's the premium you pay. But the true cost depends on how many years you calculate it, taking into account time and the cost of money. That's called the net compound cost.
The Truth About "Cheap" Term Insurance
Here's where it gets eye-opening. This person buys the policy when they're 40 years old. In 30 years, they're going to be 70 and retire. The $1 million term insurance policy expires. The net compound cost of that term insurance was $62,000, assuming a 4% annual cost of money.
So they gave up $62,000 with those term insurance premiums over those 30 years. And now at 70 years old, they have nothing to show for that $62,000 because the term policy expired.
But here's something interesting: You actually have the contractual right to keep this particular policy so you could keep it if you wanted to. But …the premiums go way up from here. They paid $1,100 a year for the 30 years of the original term. If they wanted to keep this for another year, the premium would go from $1,100 to $61,000. That's 60 times what they were paying during the original 30 year term.
This person can keep this policy up to age 95, and in that year, the premium would be $883,000 for the year. It just keeps going up every year.
Quick context - Term vs. Whole Life
I fully acknowledge that it’s highly unlikely that a 95 year old would pay an $883K premium - and this is part of my point about term insurance. No one will keep it and I think that’s a problem.
But just to put the above in context, instead of paying $883,000 for one year’s coverage of $1M, if this person had purchased a whole life policy at age 40 for $1M instead, their premium at age 95 would be …wait for it… ZERO, because, by age 95, the whole life policy would likely be “paid up” or the premium offset.
And the death benefit will have grown from $1M to $3.5M with an associated $3M in cash value.
Isn’t that wild?
The Damage Done To Your Heirs
Let's take a look at the net compound costs over their life expectancy – we'll use age 85. At age 85, the net compound cost of this term insurance is $112,000. That's what they gave up for paying for this policy.
That $112,000 doesn't seem like a massive amount over an 85-year lifespan. But if we look at what that would have cost the next generation by not making it over to the estate, and let's say this person's child lives another 50 years, at the end of their lifespan, that's $800,000.
But that's just the cost of the premiums. What did we give up by not receiving the $1 million death benefit? This is where it starts to look very significant.
The net compound cost of that $1 million that this person's child did not receive – over the course of the second generation's lifespan, if they lived to age 85 as well – is $6 million. That's starting to become real money.
But what if we took this out just one more generation and looked at the grandchild? We go out two generations and that's $43 million that this family could have had if they had just respected what that million dollars could have done for their family.
Why Every Generation Starts from Zero
This is exactly why most families never accumulate generational wealth. Every generation starts from zero because, for regular folks like you and me, most of the previous generation's wealth dies with them instead of transferring forward. Term insurance breaks the wealth-building chain. It's designed to expire exactly when families need it most – at death, when wealth should transfer to the next generation.
Whole Life Insurance - The Generational Asset
This is the kind of thing that could stay in that family, in that estate, if they had a permanent death benefit. This never goes anywhere. If you have a permanent life insurance death benefit, you're never giving this up.
In fact, this would be much greater if they had a $1 million whole life insurance policy, because the way that we structure whole life insurance, this death benefit would probably grow to something more like $3 to $5 million for each generation.
When high net worth people get to their 60s, 70s, and 80s, it dawns on them that they need to start making esate plans. Their estate planning attorney will tell them they should try to buy some life insurance to pay the estate tax. The problem is that they may no longer qualify. And if they do, the premiums will be much higher.
If they had purchased whole life in their 30s or 40s, their estate plan would alsmost be taken care of by default. And they would have had the use of that cash value all along the way.
The Bottom Line
This is really what I wanted to point out – this is the true cost of term insurance. Statistically speaking, it's highly unlikely that term insurance will pay out, but also statistically speaking, it's guaranteed that you’ll die.
Why on earth would we not want to have a guaranteed outcome paired with the guaranteed event of us eventually dying?
When someone tells you permanent life insurance is "expensive," ask them: Expensive compared to losing $43 million across three generations?
The opportunity cost of losing a death benefit isn't just the face amount – it's what that money could have done for multiple generations of your family. When you factor in generational growth, permanent life insurance isn't expensive – it's the bargain of the century.
Your family's financial tree either grows or gets cut down. The choice is yours.
I’m John Perrings, an Authorized Infinite Banking Practitioner and founder of StackedLife. Instead of taking high risk to get a high return, we help our clients implement strategies that create multiple safe returns with the same money repeatedly. It’s geometric compounding that we call Stacked Interest Acceleration, and IBC is the first step.
I’ve implemented IBC for hundreds of clients and educated thousands more via my podcast, articles, and courses at StackedLife.com.
Want to work with me? Schedule a free consultation here.